How Much Is Nanny Tax & How Is It Calculated?

“Nanny tax” refers to the federal employment tax obligations that arise when an individual hires someone to perform duties in their home. This applies to various household employees, including nannies, housekeepers, senior caregivers, and personal assistants. It is not a single tax but encompasses a combination of federal taxes that employers become responsible for when specific wage thresholds are met.

Determining if Nanny Tax Applies

The obligation to pay “nanny tax” is triggered by specific wage thresholds and the classification of the worker. For Social Security and Medicare taxes, known as FICA taxes, employers become responsible if they pay a household employee cash wages of $2,700 or more in 2024, or $2,800 or more in 2025. This threshold applies to total cash wages paid in a calendar year.

Federal Unemployment Tax Act (FUTA) obligations arise if an employer pays total cash wages of $1,000 or more to household employees in any calendar quarter. A key distinction lies in whether the worker is an employee or an independent contractor. A worker is generally considered a household employee if the employer controls what work is done and how it is done, as opposed to an independent contractor who controls their own work methods. Misclassifying an employee as an independent contractor can lead to penalties for unpaid taxes.

Understanding the Components

The “nanny tax” primarily consists of three federal taxes: Social Security, Medicare, and Federal Unemployment Tax Act (FUTA) taxes. Social Security and Medicare taxes, collectively known as FICA taxes, are shared between the employer and the employee. The Social Security tax rate is 6.2% for both the employer and employee, totaling 12.4%. This tax applies to wages up to an annual limit, which is $176,100 for 2025.

The Medicare tax rate is 1.45% for both the employer and employee, making a combined rate of 2.9%. There is no wage base limit for Medicare tax, meaning it applies to all covered wages. Additionally, an employer must withhold an Additional Medicare Tax of 0.9% from an employee’s wages exceeding $200,000 in a calendar year, though there is no employer match for this additional tax.

The Federal Unemployment Tax Act (FUTA) tax is paid solely by the employer. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. Employers can receive a credit of up to 5.4% against the FUTA tax for timely payments to state unemployment funds, which can reduce the effective federal rate to 0.6%. This credit may be reduced if the state has outstanding loans from the federal government for unemployment benefits.

Calculating Federal Household Employment Taxes

Calculating the total federal household employment taxes involves considering both the employer’s and employee’s shares. The employer’s share of FICA taxes is 7.65% of the employee’s wages, and the employee’s share, which is withheld from their pay, is also 7.65%.

To illustrate, if a household employee earns $10,000 in a year, the employer’s share of Social Security tax would be $620 ($10,000 x 6.2%), and Medicare tax would be $145 ($10,000 x 1.45%). The employer would also withhold $620 for Social Security and $145 for Medicare from the employee’s wages. For FUTA tax, apply the 6.0% rate to the first $7,000 of the employee’s wages. Assuming the employer qualifies for the maximum 5.4% credit, the effective FUTA rate becomes 0.6%, leading to a maximum FUTA tax of $42 ($7,000 x 0.6%) per employee annually.

The total federal household employment tax liability is the sum of the employer’s share of FICA taxes (Social Security and Medicare) plus the FUTA tax, in addition to the FICA taxes withheld from the employee’s wages. For the $10,000 example, the employer’s FICA share is $765 ($620 + $145), and the FUTA tax is $42. The employee’s FICA share withheld is also $765. The total tax would be $765 (employer FICA) + $42 (FUTA) + $765 (employee FICA withheld) = $1,572.

Required Employer Identification Number and Forms

Before reporting and paying household employment taxes, employers must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number used to identify employers for tax purposes and must be included on all employer tax filings. Applying for an EIN can be done online through the IRS website.

Several federal tax forms are essential for household employers. Form W-2, Wage and Tax Statement, must be issued to each household employee by January 31 of the year following the tax year. This form reports the employee’s total wages paid and the amounts withheld for Social Security, Medicare, and any federal income tax. The employer is responsible for providing copies of Form W-2 for the employee’s records, federal tax return, and state/local tax returns.

Schedule H (Form 1040), Household Employment Taxes, is used to report Social Security, Medicare, and FUTA taxes for household employees. This form is filed with the employer’s personal income tax return, Form 1040. It requires information regarding wages paid and the calculation of tax liabilities. Additionally, Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is used to report and pay the FUTA tax separately.

Reporting and Paying Federal Household Employment Taxes

Employers must ensure timely reporting and payment to the IRS. Taxes reported on Schedule H (Form 1040) are paid as part of the employer’s overall income tax liability. This can be done through increased income tax withholding from other income sources or by making estimated tax payments throughout the year using Form 1040-ES. This approach helps avoid a large tax bill or potential underpayment penalties at year-end.

Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, has a filing deadline of January 31 of the year following the tax year. However, if all FUTA taxes were deposited on time, the deadline is extended to February 10. Payments for FUTA taxes may need to be deposited quarterly if the accumulated FUTA tax liability exceeds a certain amount. Both Schedule H and Form 940 can be submitted to the IRS by mail or electronically.